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Sir I found 2 instances, very contradicting to the other in my study text,
On one hand its written that “initial capital cost could comprise any or all of the following:
….
-capitalised R&D
-NBV of existing assets to be used in the project”and on the other hand there are questions like mentioned below, where NBV($24000) holds no value as principles of relevant costs(5000+1500=$6500) are applied.
“Garfield plc is considering whether to enter into a new project. The machinery which would be used to produce the goods for the contract was purchased seven years ago at a cost of $80,000, with an estimated life of ten years. Depreciation is on a straightline basis. The machinery has been idle for some time, and if not used on this contract would be scrapped and sold immediately for an estimated $5,000. After use on this contract the machinery would have no value, and would have to be dismantled and disposed of at a cost of $1,500.
Ignoring the time value of money, what is the relevant cost of the machine to the new contract?”
So my question is how do we discern if relevant cost principles are to be applied in establishing initial capital cost or not(because using NBV figures-non cash item or including R&D-sunk cost surely contradict relevant cost idea)?
Relevant costs for decision making take into account opportunity costs and ignore sunk costs, as I explain in my free lectures on decision making.
You have asked another question relating to this about the calculation of ROCE, which I have answered. ROCE is specifically an accounts based measure but this question makes no mention of using the ROCE to make a decision.
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